DEFINITION of Free and Clear
Free and clear is a slang phrase describing the situation of someone when they gain outright ownership of an asset, such as when it is completely paid off and no creditor has a claim on the property.
BREAKING DOWN Free and Clear
The phrase is often used in reference to one's mortgage. If owner's house is completely paid off, then they own the house "free and clear."
In the case of real estate, before a sale can occur, the property must be "free and clear" so the buyers know that there are no prior claims on it. A title search company can be hired to assist prospective owners to ensure that a property has a clear title before proceeding with a transaction. If the owner does not hold clear title, there may be clauses in their mortgage that accelerate payment to force the debt to be cleared before the property can be sold.
Ways Free and Clear Property Can Factor into Financing
If a homeowner holds their property free and clear, they could make seller financing an option to potential buyers in order to complete the deal. Under such an agreement, the buyer would pay an agreed upon down payment followed by regular payments to the current owner.
Buyers of property who have the capital available might choose to pay cash to purchase real estate rather than take out a mortgage. That would grant them free and clear ownership of the property and most likely clear title to the real estate.
There are a handful of tradeoffs in owning a property free and clear. For example, there may be certain mortgage-based tax breaks that will no longer be available to the owner. Though they may have free and clear claim to the property, it is still possible that it might be seized if eminent domain were successfully to be enacted by government entities.
Once real estate is paid off and held free and clear, it is still possible for the owner to take out a new mortgage against the capital they have built up in their home, and then use that financing for other purposes. This would put the own debt again and remove the free and clear standing of the property.
The term free and clear may sometimes be used to describe a type of incremental loan facility. A free and clear term loan or debt basket, also called a freebie basket, which could be used by companies to take on more debt over time without having to face certain restrictions such as debt incurrence tests.